|
Tuesday, 8th October 2024 |
New requirements created for company directors |
Back |
Transactions involving directors - Leonora Malone explains the impact of the provisions of the Company Law Enforcement Act, 2001 enacted to date. |
The Company Law Enforcement Act, 2001 (‘CLE Act 2001’), enacted October 1st, is a lengthy piece of legislation but only certain provisions of it have been enacted to date. Of the provisions enacted to date those relating to transactions involving directors and a new provision (enacted under Section 47 of the CLE Act 2001) relating to the appointment by creditors of their own nominee as liquidator to a company are probably the most important and these are detailed below.
Another provision not yet in force but to take effect on 1st March 2002 is that which relates to the filing of annual returns. This provision is also important particularly in light of the penalties that will apply for late filing.
Part 1 and Section 111 under the first provisions of the CLE Act 2001 bought into force were SI No. 391 of 2001.
SI No. 438 of 2001 enacted different sections of the CLE Act 2001, some of which took effect on 1st October 2001, some of which came into force on 26th October 2001 and the balance of which are to come into force on 1st March 2002.
Transaction Involving Directors / Changes made by CLE Act 2001
The provisions of the CLE Act 2001 relating to transactions involving directors concern Section 31 of the Companies Act, 1990. Section 31 of the Companies Act, 1990 is a provision that was introduced in order to prohibit companies making loans to directors or persons connected with directors and/or using their assets to secure loans made to such directors. Section 31 has in practice caused difficulty in relation to funding commercial transactions because of the extent of the prohibitions contained in it.
Briefly Section 31 prohibits loans, quasi loans, credit transactions and guarantees or other forms of security in connection with loans, quasi loans or credit transactions where they are made by a company to a director of the company, a director of its holding company or made by a company to a person connected with the director or a director of its holding company. The amendments introduced in the CLE Act 2001 should help in some instances to alleviate the prohibitions in Section 31.
The first change to Section 31 is a change to the definition of credit transaction. Section 25 of the Companies Act, 1990 defined ‘Credit Transaction’. A credit transaction involves a situation where there is supply of goods or services or a sale of land and essentially payment is deferred rather than payment being made in full immediately. It includes a lease or a licence of land. The amendment under Section 75 of the CLE Act 2001 means now that a credit transaction will not include a lease of land which reserves the nominal annual rent of not more than ?10.00, where, when the company grants the lease it does so in return for a premium or capital payment which represents open market value of the land disposed of by the company. Hence such a transaction is not prohibited.
Connected Person
The CLE Act 2001 also amends the definition of a ‘Connected Person’. The definition of ‘Connected Person’ has always been a difficult provision principally because companies which are controlled by a director are also deemed to be connected persons. The changes to the definition of connected person as contained in Section 26 of the Companies Act, 1990 now clarifies:
• That a person is now connected with a director where that person is in partnership with that director within the meaning of the Partnership Act, 1890. Previously it was ambiguous as to whether the reference to partner fell within the Partnership Act, 1890; and
• For the purposes of establishing whether a company is controlled by a director and hence is connected to a director for the purposes of Section 31 the following is now the definition:
‘... a director of a company is deemed to control a body corporate if, but only if, he is, alone or together with any other director or directors of the company or any person connected with the director or such other director or directors interested in one half or more of the equity share capital of that body or entitled to exercise or control the exercise of one half or more of the voting power at any general meeting of that body.’
In order to now establish whether a company is controlled by a director and hence connected to him you not only include the director himself but also any other directors of the company and persons to which they may be connected.
Previously the threshold for determining whether a director controlled a company was control of more than one half of the equity share capital, this has now been reduced to one half or more.
• A further change to the definition of connected person is that a sole member of a private company is deemed to be connected with a director unless the contrary is shown.
Statutory Declaration of Solvency
One of the most significant changes bought about by the CLE Act 2001 is that it introduces a new Section 34 of the Companies Act, 1990 and provides a procedure (similar to that in Section 60 of the Companies Act, 1963) whereby a guarantee or security can be granted by a company in connection with a loan made to a director of the company or a person connected with the director.
Section 34 now provides that a company can avoid the prohibition contained in Section 31 insofar as it applies to a guarantee or security in connection with the loans made to a director of a company if the security/guarantee is approved by Special Resolution of the company and the directors of the Company swear a Statutory Declaration as to solvency of the company.
The procedure under Section 34 is as follows:
• The directors of a company hold a meeting at which they consider the affairs of the company and provided that they are satisfied that the company will be able to pay its debts in full as they fall due, a Statutory Declaration as to solvency of the company is made. Interestingly, not only must the Statutory Declaration provide the circumstances and the details of the guarantee/security but it must also state the benefit which might accrue to the company as a result of the transaction. This is a distinction from the Statutory Declaration under Section 60 of the Companies Act, 1963.
• A report must be drawn up by an independent person in the prescribed form who is qualified at the time of the report to be appointed, or to continue to be the auditor of the company and the report must state whether in the opinion of that person the Statutory Declaration is reasonable. Without such a report the Statutory Declaration has no effect. Once again this is different from the procedure under Section 60 of the Companies Act, 1963 relating to financial assistance where no report is required.
• A Special Resolution must be passed by the company approving the granting of the guarantee/security.
• The Statutory Declaration and the report should be filed in the Companies Office within 21 days after the date on which the guarantee or security is given.
Unlike the Statutory Declaration under Section 60 of the Companies Act, 1963, there is a possibility of personal liability for directors who make the Statutory Declaration under Section 34 Companies Act, 1990. In particular if a director makes a Statutory Declaration under Section 34 without having reasonable grounds for the opinion that the company when it enters into the guarantee or provides the security will be able to pay its debts in full as they become due, then if the company is wound up within 12 months after the making of the Statutory Declaration and its debts are not paid or provided for in full within 12 months after the commencement of the winding up, it is presumed until the contrary is shown that the directors did not have reasonable opinion. In this situation an application can be made by a liquidator, creditor or member of the company to declare that a director is personally liable for the debts and other liabilities of the company.
The above procedure only allows the company to provide security or a guarantee in connection with a loan made to a director but it does not allow the company actually provide a loan, quasi loan or enter into a credit transaction with a director or person connected.
Financial Assistance
Section 89 of the CLE Act 2001 which came into force on 1st October 2001 amends Section 60 of the Companies Act, 1963 which relates to the provision of financial assistance by a company in connection with a purchase of its shares. Now the Statutory Declaration which is sworn under Section 60 which previously had to be filed in the Companies Registration Office on the same day as notices of the Extraordinary General Meeting were issued can now be filed within 21 days after the date on which the financial assistance was given. This is a helpful provision because previously the requirement that the Statutory Declaration had to be filed on the same day as notices of the EGM were issued did cause, at times, a pressure to comply with timing deadlines for filing in the Companies Registration Office.
One of the provisions of the CLE Act 2001 which is worth special note is Section 47. It introduces a new section, Section 267(3) of the Companies Act, 1963 and provides that if at a meeting of the creditors of a company a Resolution as to the creditors' nominee for liquidator is proposed then in order for it to be passed, a majority in value of the creditors presently entitled to vote in favour of the Resolution is required. Until now if creditors were to appoint their own nominee they required a majority not only of the number of votes but also a majority in value of the votes. The practical effect of this sub-section is that it will be easier for creditors to appoint their own nominee as liquidator.
Annual Returns - 1st March 2001
SI No. 438 of 2001 fixes 1st March 2002 as the day on which Section 60 of the CLE Act 2001 shall come into operation. Section 60 repeals and substitutes Section 127 of the Companies Act, 1963 which specifies the time limit within which a company must file its annual return with the Registrar of Companies. This Section also introduces a new concept of an Annual Return Date (ARD), being a specific date in each year to which a company must make its annual return.
Prior to the commencement of this Section, the Registrar could not establish whether a company has failed to complete and file its annual return on time as the return date was determined by the date of the annual general meeting which the Registrar could not ascertain.
The Section provides a method for determining the ARD so that the Registrar can ensure compliance of annual return filing requirements which may be summarised as follows :-
• For a company incorporated prior to 1st March 2002 that has made a previous annual return, the ARD is the anniversary to which the most recent return is made up.
• For a company incorporated on or after the 1st March 2002, the ARD is six months after incorporation, but such a company need not annex accounts to its first return.
• For a company incorporated prior to 1st March 2002 that has not made a previous annual return, the ARD is six months after the anniversary of incorporation, such ARD being after 1st March 2002. In other words, the ARD will be 6 months or 18 months after the date of incorporation of the company.
The accounts annexed to the annual return shall not be made up to a date more than nine months before the ARD. The annual return will be in a format prescribed by regulation and must be delivered to the Registrar of Companies 28 days after the ARD or 1st June 2002, whichever is later.
From 1st March 2002, the Minister may extend the ARD of a company so that it corresponds with the ARD of its holding or subsidiary company or a court order will be required to extend the time of delivery of the Annual Return and if granted, a copy of it must be delivered to the Registrar of Companies ‘as soon as possible’.
Non-compliance with the provisions of Section 60 of the CLE Act 2001 shall deem the company or any officer guilty of an offence. From 1st October 2001, the Registrar will have the power to issue a notice prescribing for, inter alia, non-filing fines, prompt payment of which will prevent prosecution if the default is remedied within the period specified in the notice. He may also impose different fees depending on when documents are filed.
The ARD may be changed if :-
• the annual return is made up to a date earlier than 14 days before the existing ARD, the new ARD becomes the anniversary of that earlier date.
• a company delivers an annual return to the Registrar of Companies within 28 days of the first ARD after 1st March 2002 (to which it is not required to file accounts) and nominates a new ARD within 6 months thereafter. The company cannot use this procedure again until 5 years from the new ARD have elapsed.
• for a company incorporated before 1st March 2002, a company delivers an annual return to the Registrar of Companies within 28 days of the first ARD after 1st March 2002 (to which it need not annex accounts) and nominates a new ARD within 6 months thereafter. A company must submit at least one annual return with accounts annexed thereafter before using method (b) above if it wants to change its ARD again. |
Leonora Malone is a partner in Eugene F Collins, firm of solicitors.
|
Article appeared in the November 2001 issue.
|
|
|